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Rating Action:

Moody's confirms InterGen's ratings, outlook negative

27 Jul 2021

London, 27 July 2021 -- Moody's Investors Service (Moody's) has today confirmed the B1 corporate family rating (CFR), B1-PD probability of default rating and B1 senior secured rating of InterGen N.V. (InterGen). The outlook has been changed to negative from "ratings under review".

Moody's placed InterGen's ratings under review for downgrade on 3 June 2021 following an explosion and fire at the Callide C coal-fired power station in Queensland, Australia, which severely damaged one of the plant's two units. The review also took into account the failure of InterGen's Millmerran joint venture, which also owns a coal-fired power station in Queensland, to refinance AUD 212 million of project loans ahead of their maturity in June 2021.

Since the ratings were placed under review, InterGen has made a GBP 12.1 million shareholder loan to Millmerran in order to secure the refinancing of the project's term loan facility, announced a further delay to the planned recommissioning of the Callide C power station and paid a GBP 38 million dividend to its shareholders. Although each of these developments is negative for InterGen's credit quality, the confirmation of the ratings reflects Moody's view that the risks are captured in the current rating and negative outlook.

RATINGS RATIONALE

RATIONALE FOR RATING AND OUTLOOK

InterGen's B1 rating and negative outlook reflect the likelihood of lower dividends from its Australian joint ventures, uncertainty over the terms of a lease extension at the site of its Rocksavage power station in the UK and a financial policy that appears to prioritise dividend distributions. Refinancing risk will rise as the June 2023 maturity of most of InterGen's debt approaches, given weaker projected metrics at that time and lenders' growing focus on ESG-related risks to coal and gas generators.

On 13 July, following the extension of the June 2021 repayment, InterGen announced that Millmerran had refinanced its AUD 555 million debt facility into a new AUD 364 million, 5-year bank facility due June 2026[1]. The deleveraging was achieved by use of cash at the project and OzGen, an Australian holding company 50%-owned by InterGen, and approximately AUD 70 million of new loans from the project's shareholders, including GBP 12.1 million from InterGen. InterGen initially believed that it would not need to provide such direct support to the project. Annual debt amortisation under the new facility, as well as expected repayment of the shareholder loans in 2022, makes it unlikely that Millmerran will contribute material dividends to InterGen in 2021 and 2022, although removal of the 2023 bullet maturity makes distributions in subsequent years more likely.

Both Callide C units remain offline following the fire on 25 May. CS Energy Ltd., which operates the plant, now expects Unit C4 to return to service in December 2022, significantly later than its initial expectation of June 2022. Unit C3 returned to service on 26 July, later than its original target of June 2021. Although Moody's understands that Callide C has insurance for property damage and business interruption for a significant part of the anticipated outage, reduced cash flow and uncertainty around the cost of repairs and timing of Unit C4's return to service is negative for InterGen's credit quality.

InterGen remains in negotiations to extend its lease on the Rocksavage site, which ends in March 2024. Although Moody's expects InterGen and the landowner to agree an extension, failure to win a capacity contract for 2025-26, the closure of this plant, or a significant increase in lease expense would be credit negative for InterGen.

InterGen also announced on 13 July that it would pay a dividend of GBP 38 million to its shareholders, an increase from the GBP 30 million paid in 2020. InterGen had not paid material dividends for several years prior to Sev.en Energy's acquisition of a 50% stake in February 2019. Moody's regards the size of the dividend, relative to projected funds from operations of around GBP 65 million in 2021, and its timing, ahead of resolving material uncertainties and refinancing the June 2023 maturity, as negative for credit quality.

In addition, InterGen's B1 CFR continues to reflect the company's significant exposure to volatility in wholesale energy prices and volumes, structural subordination to the remaining project finance debt at Millmerran and the Spalding Energy Expansion project, and relatively high carbon intensity, mitigated by its efficient thermal generation fleet and diversification across Great Britain and Australia. Although the company's cash balances have been depleted by the dividend and shareholder loan, they remain over GBP 100 million, providing scope to deleverage ahead of or alongside the June 2023 bond maturity. Since June 2021, InterGen has had the option to repay the $410 million (approximately GBP 300 million) of senior secured notes at par.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The outlook could be changed to stable following refinancing of the June 2023 debt maturity if Moody's believes InterGen will be able to maintain FFO/debt sustainably above 8% and debt/EBITDA, based on consolidated and unencumbered assets, declining toward 6x.

In the longer term, the ratings could be upgraded if InterGen maintains FFO/debt consistently above 12% with prudent liquidity, or if there were a significant increase in revenue visibility as a result of long-term offtake contracts with creditworthy counterparties.

The ratings could be downgraded if FFO/debt appears likely to fall persistently below 8% or if debt/EBITDA was persistently above 6x. The ratings could also be downgraded if InterGen fails to secure liquidity comfortably ahead of the 2023 debt maturity or pays further dividends before doing so, or if there were changes in the company's business profile that increased cash flow volatility without offsetting measures to strengthen the balance sheet.

The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1066389. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Edinburgh, United Kingdom, InterGen N.V. is a holding company with a 3,269 MW portfolio in operations consisting of four natural gas-fired power plants in the UK and two coal-fired power plants in Queensland, Australia. InterGen N.V. is owned by Sev.en Energy and China Huaneng Group Co., Ltd. (A2 stable).

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

REFERENCES/CITATIONS

[1] EuroNext announcement, Millmerran Refinancing and Dividend, 12-Jul-2021, https://direct.euronext.com/api/PublicAnnouncements/RISDocument/Ann-Millmerran%20refi%20%20div-InterGen.pdf?id=39ceacde-5e92-4c05-b532-ed51bf4ce5b3

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Graham Taylor
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Neil Griffiths-Lambeth
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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